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Analysis of Banking Structure of Deutsche Bank

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Type of Academic Paper – Report

Academic Subject – Education

Word Count – 1514 words

 

Research Question:

Identify the current form of banking structure of Deutsche Bank. Discuss and analyse the positive and negative aspects.

The banking structure of various global and national/local banks is formed to provide expert and dynamic financial services to communities at large. The banking structure formulations are primarily based on critical parameters such as debt and equity, trading, sales, research, mergers and acquisitions, product risk management, transactions etc. However, the global financial crisis has impacted banks in various ways, including increasing its regulatory burdens. Banks face the pressure of reducing the risk and complexity of their banking structure to enrich resolvability and profitability, insisting that the stakeholders/banks reconsider their operational structures (Shooter et al., 2015). Since the onset of the global financial crisis, many banks have reduced their global structure footprint. Nonetheless, increased pressure to produce revenues pushes many banks to maintain their commitment to offering varied services and operations across numerous diverse markets, making them into multinational companies (MNC). Thus, it becomes imperative to overcome the operational and regulatory obstacles to create banks with structures and operational models that are robust and complaisant.

One of these financial MNC, the Deutsche Bank (DB), which is the focus of this research, has 140 years of international banking experience. Since the company’s conception, it visualised itself as an international bank which is evident from its purpose statement;

“To transact banking business of all kinds, in particular, to promote and facilitate trade relations between German, other European countries, and overseas markets.”
(Deutsche Bank, 2009).

To fulfill this objective, Deutsche Bank needs to possess a strategy and strong banking structure. According to Johnson and Scholes (2002, p. 10), a strong strategy is capable of providing direction and scope to the organisation over a period of time by achieving an advantage for the organisation through adequately using its resources within a changing market environment and fulfilling stakeholder expectations (as cited in Dietrich 2008). The report discusses Deutsche Bank’s current banking structure to analyse and assess the company’s negative and positive aspects through the specific structure’s implementation.

The Deutsche Bank, a German global bank with the headquarters in Frankfurt, competes within the banking industry specifically as a global investment bank, commonly termed as a modern universal bank (Jahn and Kick n.d.) providing its clients with services ranging from account-keeping, cash and securities, investment advisory to asset management (DB, 2009). The bank has a large number of employees and operates worldwide, typically in Europe, America, and Pacific Asia as well in the emerging markets. Their banking structure is based upon serving the business and private clients, institutional as well as corporate clients through the provision of services such as trading, sales, equity, mergers and acquisitions, risk management, banking transactions, wealth management, retail banking, funding/investments banking and corporate financing.

Although, the Deutsche Bank’ structure is known to earn a majority of its profits through investment banking and foreign exchange, but has been attempting to build on less risky business such as lending to consumers (Ewing 2011). However, the DB has been facing a slump in trading revenue since 2011, with net income declining from 4.326 million euros in 2011 to 1.691 million euros in 2014 (DB, 2014). In 2011, the bank earned greater in their second quarter from noninvestment banking businesses that lifted the net profit by 6 per cent to 1.2 billion euros but still were considered short of analysts’ predictions (Ewing 2011).

To improve the company’s profitability and optimise its operational banking structure, the Deutsche Bank had announced the new leadership in the form of co-CEOs Anshu Jain, Indian born head of investment bank, and Jurgen Fitschen, the native German head of the German bank unit. The bank is dominated by German values which gave rise to choosing a dual CEO model as some feared the bank would neglect its German roots and expand risk-taking activities (Reuters 2011). However, both co-CEOs were ousted

on June 6th, the company continued to lose profitability since their appointment and was replaced with John Cryan who will act as co-CEO with Jurgen Fitschen until Fitschen departs from the company on May 19, 2016, making Cryan sole CEO (Davies, 2015).

Under Cryan’s leadership, the bank is restructuring to cope with regulatory changes and litigation costs by splitting its investment bank into corporate and investment banking (CIB). Global markets focused on sales and trading (Davies, 2015). An immediate impact of the new appointment and the proposed structure changes led to an increase of shares by 2.5 per cent to 26.61 euros at the beginning of trading on Monday, Oct. 12, 2015. This has been the highest level of shares in the market since August 2015 (Ewing 2011).

Using Cryan’s new structure, Deutsche Bank will benefit from increased operational efficiency, cost savings, and compliance benefits. Furthermore, using the re-structured model, Deutsche Bank might operate and expand in an improved way where regulatory boundaries are less vivid. According to Jahn and Kick (n.d.), regulatory demands have increased. They will continue to do so with regulators becoming more assertive and less tolerant of overly complex organisations like Deutsche Bank. The bank’s new structure is designed to be simplified with the bank focusing more on its four new divisions on four sets of clients: large businesses, institutional investors, asset managers, and individual clients (Turner and Strasburg 2011).

Furthermore, on the restructuring, Deutsche will set up a new independent digital bank that will attempt to ward off new digital challenges faced by Deutsche suite of businesses (Shooter et al. 2015). To shrink the bank’s global footprint to a more regional one, DB will close all its Russian operations except for transaction banking services. DB is attempting to find the right combination of near-shoring and off-shoring, critical to the bank’s expansion plans. This is critical as DB has been facing investigations from regulators worldwide for alleged wrongdoing, including breaking US sanctions against Iran, rigging the Libor interest rate, and foreign exchange markets to money laundering in Russia (Shotter et al. 2015).

However, a drawback to decreasing the global footprint of a bank, such as the expected cost savings, is lower than expected (Barth et al. 1997). Moreover, it takes longer than usual to deliver the savings achieved from closing off-shore operations and developing a new regionally robust process. Many banks have attempted to lower costs from closing offshore operations, but the price of doing so comes extremely high. Emerging markets that have not experienced wage inflation can provide an increased labour profit from the purchase and sale of assets (Dietrich 2008). Many global customers and employees enjoy international banks such as Deutsche Bank that are not offered by their regional banks. One of the drawbacks of Deutsche’s restructuring will expect job losses estimated to reach by the thousands (Shotter et al. 2015).

Barth et al. (1997) and Dietrich (2008) asserts that using microeconomic theory, restructuring results in an increase of allocated efficiency by forcing prices to converge with marginal costs. Using newer and more improved production methods, banks such as Deutsche may increase its longer productivity. Keeping in mind the banking system’s macroeconomic importance, the bank must be structured and organised in such a way to foster innovation that results in productivity, growth and profitability to the business at large.

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References

Barth, J. R., Nolle, D. E., and Rice, T. N. (1997) ‘Commercial banking structure, regulation, and performance: An international comparison.’ Office of the Comptroller of the Currency– Economics Working Paper. [online] Available from:http://www.occ.gov/publications/publications-by-type/occ-working-papers/1999-1993/97-6txt.pdf [Accessed: 16 Nov. 2015].

Davies,  A.  (2015) ‘Deutsche  bank names new bosses for  investment bank,  global markets.’ Reuters. [online] Available from: http://www.reuters.com/article/2015/11/12/us-deutsche-bank-restructuring-idUSKCN0T11L820151112#7J79qWwRD59d2dc2.97
[Accessed: 17 Nov. 2015].

Deutsche  Bank (DB), (2009) Faktenblatt.[online] Available from:
https://www.db.com/newsroom/de/docs/Faktenblatt.pdf   [Accessed 15 Nov. 2015].

Dietrich, B. H., (2008) German Banking Structure, Pricing, and Competition: Implications
and International Policy Perspectives. Frankfurt am Main: Peter Lang.

Ewing, J., (2011) ‘Deutsche bank posts disappointing profit.’ The New York Times- Deal Book. [online] Available from: http://dealbook.nytimes.com/2011/07/26/its-leaders-chosen-deutsche-reports-flat-profit/?_r=0   [Accessed: 17 Nov. 2015].

Jahn, N., and Kick, T. (n.d.) ‘Determinants of banking system stability: a macro-prudential

analysis.’  Deutsche Bundesbank.[online]  Available  from:

http://www.bis.org/bcbs/events/bhbibe/jahn.pdf. [Accessed 17 Nov. 2015]

Reuters. (2011) ‘Deutsche bank names Anshu Jain, Juergen Fitschen to become co-CEOs. The Economic Times. [online] Available from: https://web.archive.org/web/20121020041042/http://economictimes.indiatimes.com/news/international-business/deutsche-bank-names-anshu-jain-juergen-fitschen-to-become-co-ceos/articleshow/9364591.cms    [Accessed: 17 Nov. 2015].

Shooter, J., Arnold, M., and Martin, K. (2015) ‘Deutsche bank culls executives and splits investment banking unit.’ The Financial Times. [online] Available from: http://www.ft.com/intl/cms/s/0/850c9f80-7592-11e5-933d-efcdc3c11c89.html#axzz3rkbFgkdP   [Accessed: 17 Nov. 2015].

Turner, G., and Strasburg, J. (2015) ‘Deutsche bank reshuffles top ranks of investment bank.’ The Wall Street Journal. [online] Available from : http://www.wsj.com/articles/deutsche-bank-reshuffles-top-ranks-of-investment-bank-1447343962     [Accessed: 17 Nov. 2015].

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